Investment Zones: Maximising Success

Introduction

Government has launched a “refocused Investment Zones programme….aimed at catalysing a small number of high-potential clusters in areas in need of levelling up to boost productivity and growth.”

It is very positive that Investment Zones are being focused on growing knowledge based clusters and innovation districts (as we suggested last year) which can be home to highly productive, research intensive businesses. There is consensus across the political spectrum to make the UK a science superpower, and to grow clusters and sectors where we have particular strengths. With growing momentum and ambitions plans around innovation districts in UK cities, the refocused approach to Investment Zones has great potential.

Each of the Mayoral Combined Authorities in the Midlands and the North of England have been invited to submit proposals for an Investment Zone, with the potential for the initiative to also be agreed with the devolved administrations in Scotland, Wales and Northern Ireland. The Investment Zones Policy Prospectus sets out guidance on developing the local projects, and details of the government support and fiscal incentives available. There is much that is very positive in the Government’s policy offer: fiscal incentives to businesses and places; not insignificant capital and (importantly) revenue funding; and a clear commitment to align wider policy and investment in R&D and economic development with Investment Zone strategies. ???

As cities and combined authorities respond, I suggest five calls to action.

1.???Identifying the right locations and sectors

Identifying the right locations and sectors will be critical. The “core” spatial focus (where tax and business rates retention sites will be located) should be “where interventions should focus on facilitating co-location of businesses, fostering collaboration between industry and research institutions, and driving innovation in companies at the frontier of the target sector.” ?There should be a focus on one of five target sectors (digital, life-sciences / med-tech’ creative, green industries, advanced manufacturing). Positively there is scope to consider linkages and common features (for example around specific technologies and skills) across sectors, which is to be welcomed, recognising that our largest cities often have a related diversity of sectoral strengths.

This all points to the need for Combined Authorities to be hard-headed and evidence-based in identifying their genuine sector strengths, and the locations with the strongest research capabilities and greatest scope to crowd-in private sector investment. This is likely to point towards the innovation districts in the centres of the core cities, as well as linked sites that have capacity and potential for large scale job growth and investment in functions like manufacturing or some lab space that are not always possible to develop in city centres.

Places should avoid the temptation to spread Investment Zones too widely across sites with weak functional economic linkages and places with limited research strength and investor appetite.

Instead proposals should set out how wider supply chains, skills and opportunities can be created across wider functional economic areas, linked to the “core” areas of spatial focus. Interventions could include business support and innovation initiatives, educational institutions and collaborations linked to the strengths of the core of the investment zone, and skills initiatives. This could be part of a wider approach to encourage inclusive innovation.

2.???Getting the right mix of fiscal incentives and public sector investment

It will be essential to get the mix of fiscal incentives and Government spending right, with places having access to incentives and flexible government funding up to ￡80m over five years. The availability of flexible spending to support initiatives such as research and innovation, skills, local infrastructure, enterprise and planning and development can really help places support growth (the fact 40% of this spend will be revenue is particularly positive).

The proposals to allow 100% local retention of business rates growth in Investment Zones for 25 years is a powerful tool, which places could seek to lever to create an income stream to borrow against to reinvest in local infrastructure and economic development. The Enhanced Capital Allowances can be an attractive incentive, particularly for investment in manufacturing and labs, but places will need to identify sites suitable for those uses. Other tax reliefs could include business rates relief, enhanced structures and building allowances, and employer National Insurance Contribution Relief. However, the cost of all these incentives (capped at ￡45m over five years) are to be deducted from the overall ￡80m funding envelope over five years.

The strength of the local innovation ecosystem, skills base and the availability of premises are likely to be more important for knowledge-based businesses than some small-scale fiscal incentives, which perhaps points to places seeking to retain more flexible spending. As Neil Lee has argued the offer for Investment Zones needs to be much more than cost efficiency, citing the fact that Google’s largest European R&D facility is in high-cost Zurich. Places should mitigate against the big risk that fiscal incentives cause displacement of economic activity, or deadweight (activity that would have happened anyway). It will also be necessary to consider risks under subsidy control law.

There is a clear commitment to align wider Government policy and investment with Investment Zones, for example R&D spending, Levelling Up Fund, and UK Shared Prosperity Fund. Combined and local authorities should identify how their own funding and assets can be used. This provides the potential to crowd-in significant additional public investment. The two Innovation Accelerators announced for the West Midlands and Greater Manchester will be significant, and there is surely a strong case for further innovation accelerators across the other Investment Zone areas.

3.???Accelerating planning and development by providing certainty

Places should introduce faster planning, not less planning, and focus on increasing the supply of the right types of commercial space. By setting out a clear and flexible spatial framework, places can provide greater certainty to investors, sending clear signals to investors, and help ensure the right quality of development with good public realm and green infrastructure. Robust design codes can also provide clarity and certainty and send the right signals to the market on the nature of ambition, the economically productive uses, and quality of development being targeted.?Local Development Orders and / or Planning Performance Agreements have a role to play.

Councils, Combined Authorities,?Homes England?and the?UK Infrastructure Bank?should work together to develop right mechanisms for sharing risk & reward with private sector to get?more office, innovation / lab, & manufacturing space built, which as?Centre for Cities?have rightly said, is really needed.

4.???Thinking beyond bricks and mortar – building the partnership and ecosystem

Places need to think beyond bricks & mortar. There should be a focus on building the softer ecosystem to commercialise innovation. One of the notable and very positive features of the Investment Zone Policy Prospectus is how it emphasises the importance of Government at all levels working with the private sector, universities and other research institutions, we can create the right environment and culture of collaboration for successful cluster growth. MIT through their?MIT REAP - Regional Entrepreneurship Acceleration Program?framework have identified the main actors that need to work together to be more than the sum of their parts: universities and other knowledge producers; entrepreneurs; corporates; investors of risk capital; and government. In short, we need to do the D not just the R. ?This means that successful Investment Zones will need strong partnerships with the right players around the table.

Places should identify the gaps and weaknesses in the local ecosystem. For instance, outside London there is a limited range of high-quality accelerator programmes to create a strong pipeline of investment-ready start-ups. Linked to this there are also underdeveloped angel investment networks. Initiatives such as NorthInvest which connect start-ups with angel investors are achieving real success but need more support.

The Investment Zones Policy Prospectus is clear that universities or other research institutions need to be at the heart of the proposals. Universities are strengthening their civic roles, alongside their traditional research and teaching roles, including through civic university agreements. They will need to lean-in to the Investment Zones proposals, align their own investments (including capital spend) and help lead. Universities should consider their policies and models around taking equity in spin-outs; there are some suggestions that current approaches hold places back. There is strong scope for Investment Zones to leverage universities to attract inward investment. Midlands Innovation are doing some great work here, as are?Invest Newcastle.

There is potential to adopt a mission-orientated approach, building partnerships and innovation initiatives around tackling societal challenges, such as responding to climate change, improving health outcomes, enhancing mobility and access to services, or tackling social exclusion. Firms respond to future profit, market and growth opportunities where there is societal need. These can be fostered by government and universities.

We can create a network of?testbeds?in Investment Zones to enable innovators and entrepreneurs to test their solutions and their use cases in real-world conditions. Smart regulation can have a role to play here, where innovations require relevant regulatory change to develop and thrive.?

5.???Developing strong local leadership and strategies

It is clear that successful Investment Zones will need clear, coherent and compelling strategies, based on evidence, realistic proposals and projections for future change, and around which partners can build a coalition and shared commitment. This will need to be positioned within the context of wider strategies and plans for growth, and critically where the private sector is likely to invest. Dedicated leadership and delivery capacity will be needed.

There is scope to learn from successful innovation districts cglobally, and also the ambitious CHIPS and Science Act in the US.

Monitoring and evaluation plans should be factored in from the start (as they have with the Freeports evaluation we are leading for DLUHC), with a clear theory of change, and particular attention needed on assessing displacement and substitution effects.

All this will require local authorities and Combined Authorities to focus on being conveners and catalysts, not controllers, to work with and through others to achieve a positive impact disproportionate to the powers and resources under their direct control. Investors, entrepreneurs, and R&D-intensive corporates. The real prize here is not the ￡80m of public sector investment; it is the potential to leverage in billions in private sector investment and create thousands of jobs.

Conclusion

The UK has huge strengths in its world class universities and in its capabilities in sectors such as life-sciences, digital, creative, advanced manufacturing, and green industries. The innovation districts and science parks around our core cities have huge potential to leverage these strengths and contribute more to national growth, complementing the strengths of London and the South East, Oxford and Cambridge. ?

So the refocusing of Investment Zones on innovation and clusters is really positive, and the package of policy, fiscal funding available creates a major opportunity. To maximise their potential, we need to identify the right locations and sectors as well as ensuring they link across wider city region economies, get the right mix of funding and fiscal incentives, adopt a plan-led approach to speeding up development, strengthen public-private-university partnerships and innovation ecosystems, all underpinned by good strategies and strong and collaborative local leadership. This is a huge opportunity for our cities and city regions, and UK plc.?